Private Equity Accounting System

A prominent private equity firm had difficulties with recording and reporting values in their portfolio owned by their various collections of partners. When the business was small, off the shelf software was adequate to do the task, but as the number and caliber of the deals increased, along with the number of partners, it became more and more complicated, and difficult to control.

There were only rudimentary manual controls imposed on the partnership portion of their accounting for each new deal, where each deal typically involved scores of partners, and combinations of partnership entities. Quarterly, each partner and partnership entity was provided a detailed listing of each deal still open, and what their share was worth, both on a carried interest , and side-by-side basis. When we arrived, there were 4 fire drills a year.We listened to the history from their finance people, and heard the problems they had in controlling the valuations and accounting for holdings in the firm’s $15 billion equity, mezzanine and real estate funds.Then we devised a plan to transfer all of the entries from their 10 year history from the multiple off-the-shelf accounting systems they had been using to a single Microsoft SQLServer Database. We devised controls to reconcile all of the historical entries, and researched and addressed all of the discrepancies we found. Then we designed an Excel input template for new deals (bearing in mind that each deal had a unique set of partners), that forced balancing and reconciliation prior to the ‘deal’ being entered into the SQL Database. Because each partner (possibly in each deal) had his own arrangement on what happened to his shares in the event of his retirement prior to the liquidation of that deal, we had to reference those terms in the database as well.With the input reconciled and controlled, we then addressed the issues of reporting. Valuations were estimated by various methods at the end of each quarter for each deal. These valuations were entered into a table, so that historical records could be calculated according to conditions which had persisted at that time. At first, each partner, or partner entity would receive a paper carried interest report and a side-by-side report each quarter detailing all of their holding and their value. Finally, these records were made available on the firm’s intranet on a private account basis for each partner.The changes we made in their accounting system allowed the yearly volume of private equity and real estate to double, with far less clerical effort on the part of their financial accounting department.